Featured Research

from universities, journals, and other organizations

Bluffing Could Be Common In Prediction Markets, Study Shows

Date:

July 16, 2008

Source:

University of Michigan

Summary:

A new mathematical model suggests that bluffing in prediction markets is a profitable strategy more often than previously thought. The analysis calls into question the incentives such markets create for revealing information and making accurate predictions. The researchers also pose a tactic to discourage bluffing.

Related Articles

The analysis calls into question the incentives such markets create for revealing information and making accurate predictions. The researchers also pose a tactic to discourage bluffing.

A prediction market is a financial speculation market in which participants bet on the outcome of an event. In most cases, participants use fake money. But at some markets, including the Iowa Electronic Markets, it's legal to bet a small amount of real money. Sports betting Web sites, which are legal in other countries, could be considered prediction markets. Some companies are even using prediction markets as a project management tool to allow employees to predict when a project will be completed.

Studies have indicated such markets could be more accurate than polls in predicting events. But dishonest tactics such as bluffing can cloud their accuracy.

"We're the first to demonstrate that strategies involving deception of future traders are a real possibility under a wide range of information conditions," said Rahul Sami, an assistant professor in the U-M School of Information. "It could happen quite widely that bluffing is profitable."

Sami and Stanko Dimitrov, a doctoral student in the Department of Industrial and Operations Engineering, are authors of a paper on the research that Dimitrov presents July 11 at the ACM Conference on Electronic Commerce in Chicago.

"At a certain level, you don't care who makes money and who doesn't. But if you're running a prediction market, the whole point is to make predictions and you want your predictions to be reflecting the actual information the participants have," Sami said. "What bluffing does is worsen the predictions with the wrong information. It defeats the purpose."

The researchers' solution to bluffing is to penalize later trades by charging participants to make them.

Sami explained how bluffing can be profitable in a prediction market and how his new strategy could give participants more of an incentive to be honest.

It's an artificial example, Sami said, but suppose a prediction market involves two traders and the outcome of two coin flips. Participants bet on whether both coins will land the same or different. Each participant can see the outcome of one of the coin flips. This represents the fact that all participants in a prediction market presumably have a piece of information that helps them decide which outcome they believe is most likely. Each participant typically trusts that everyone is betting honestly.

One person must bet first and this person would not have the benefit of additional information from other participants. Say the first participant's coin is heads. If this trader wishes to bluff to extract more information from the other better, she could bet that both coins are tails (knowing this is impossible.) The other trader might read this as proof that the first trader's coin is tails. So if his is tails, he would also bet that both coins are tails. Now, because of the bluff, the prediction market is not reflecting the outcome that is truly the most likely.

The first trader in this scenario now assumes that the second trader's coin is tails and would likely change her bet to reflect that the coins are different. She would win more money. Charging people to change their bets would give them more incentive to be honest from the start, the researchers say.

"I think it's important for people to consider our results when launching a prediction market," Dimitrov said. "The whole point is to aggregate information. Discounting is one way to guarantee information aggregation even with the presence of bluffing."

The paper is called "Non-myopic strategies in prediction markets." The research is funded by the National Science Foundation.

More From ScienceDaily

More Computers & Math News

Featured Research

Mar. 3, 2015 — By examining the forces that the segments of mosquito legs generate against a water surface, researchers have unraveled the mechanical logic that allows the mosquitoes to walk on water, which may ... full story

Mar. 3, 2015 — Major cities in the UK are falling behind their international counterparts in terms of their use of smart technologies, according to a new study. The research has found that smart cities in the UK, ... full story

Mar. 3, 2015 — To simulate chimp behavior, scientists created a computer model based on equations normally used to describe the movement of atoms and molecules in a confined space. An interdisciplinary research ... full story

Mar. 3, 2015 — Magnetic vortex structures, so-called skyrmions, could in future store and process information very efficiently. They could also be the basis for high-frequency components. For the first time, a team ... full story

Mar. 2, 2015 — The odds of picking a perfect bracket for the NCAA men's basketball March Madness championship tournament are a staggering less than one in 9.2 quintillion (that's 9,223,372,036,854,775,808), ... full story

Mar. 2, 2015 — Scientists report that they could observe experimentally the current flow along channels at the crystal surfaces of topological insulators. The channels are less than one nanometer wide and extend ... full story

Mar. 2, 2015 — Organic light emitting diodes (OLEDs), which are made from carbon-containing materials, have the potential to revolutionize future display technologies, making low-power displays so thin they'll wrap ... full story

Mar. 2, 2015 — What if one day, your computer, TV or smart phone could process data with light waves instead of an electrical current, making those devices faster, cheaper and more sustainable through less heat and ... full story

Mar. 2, 2015 — 3-D printing could become a powerful tool in customizing interventional radiology treatments to individual patient needs, with clinicians having the ability to construct devices to a specific size ... full story

Featured Videos

Forensic Holodeck Creates 3D Crime Scenes

Reuters - Innovations Video Online (Mar. 3, 2015) — A holodeck is no longer the preserve of TV sci-fi classic Star Trek, thanks to researchers from the Institute of Forensic Medicine Zurich, who have created what they say is the first system in the world to visualise the 3D data of forensic scans. Jim Drury saw it in operation.
Video provided by Reuters

Related Stories

Apr. 29, 2014 — High speed algorithms have so revolutionized the design and functioning of our stock markets that they are fast tearing up the rule book in how these markets are regulated, according to a ... full story

July 1, 2013 — When it comes to economics versus psychology, score one for psychology. Economists argue that markets usually reflect rational behavior -- with the dominant players in a market, such as hedge-fund ... full story

Jan. 7, 2013 — If you have ever wondered why you never seem to win at skill-based games such as poker or chess, there might be a very good reason. Scientists have discovered that some games are simply impossible to ... full story

Apr. 5, 2012 — Researchers have found a way to measure the likelihood of global stock market losses by identifying periods in which shocks may be more likely to spread across many national markets. This ... full story

ScienceDaily features breaking news and videos about the latest discoveries in health, technology, the environment, and more -- from major news services and leading universities, scientific journals, and research organizations.